One of the hottest trends in investing is private equity, or as some refer to it as “pioneer” investment. This article will take you through the basics of what private equity is, how it works, and some examples of PE investments.
Private equity comes from the phrase “private investor,” which means those individuals with capital are buying and running companies instead of looking for another job. The investors get paid back their money with profits in the form of dividends or appreciation of the stock.
There are two main types of private equity: venture capital (also called growth funding) and strategic acquisitions.
Venture capitalists look at small businesses that have potential but may not be performing well yet. They give them additional resources and help grow the business.
Acquisition professionals buy large corporations and re-brand them or turn them into new brands. These firms can sometimes close down operations or cut costs by selling off unneeded assets.
Reasons why real estate private equity is a good idea
There are many reasons why investing in real estate with other people makes sense. First, you can invest directly in individual properties or in a fund that invests in several properties. This removes the need to manage separate investments, which takes time and energy.
Second, both types of investment require large amounts of money, but not as much cash as buying and selling stocks. You will have to make an initial investment, and then monthly or yearly contributions, but you do not need to buy a lot at one time.
Third, most people associate real estate with income, so it is more likely to grow compared to stock markets where some strategies include capital gains. By owning rental property, you get this double benefit.
Fourth, there are few barriers to entry for those looking to invest in real estate. All you need is your savings and a little knowledge about mortgages and rents.
Steps of how to start a real estate private equity fund
Starting your own real estate investment firm comes with its share of costs, which can be expensive. But you are investing in a market that is growing rapidly, so there’s always a demand for these properties. And while some people talk about the benefits of buying and renting property directly, creating an offshoot company to invest in commercial or residential real estate makes sense too.
By adding another layer of bureaucracy, you reduce your risk by having someone else take over operations if something goes wrong. This gives investors more protection from losses. Plus, it creates an opportunity for additional income since most PE firms pay dividends or return profits to their shareholders.
There are several ways to launch this new business entity. The best way will depend on your goals and what kind of capital you have access to. Here are some tips for getting started as a REPFY investor.
Selecting the right partner
As mentioned before, private equity is not your average buying group. They are not looking to take over small businesses and run them as subsidiaries! That being said, it’s important to know what types of partners you want to work with.
A real estate investment firm that is looking to make large acquisitions will not typically invest in smaller business loans or mortgages. These types of investments are better described as ‘banking-style’ investing.
Real estate investment firms that focus more on purchasing and developing commercial property or even residential properties are much less likely to include banking style investments. This makes sense because they have enough capital to buy bigger companies!
Be very careful about offering too much credit to any one investor at any time. Many times, these individuals will not show up to work until weeks later when they get their lunch break. If someone doesn’t pay their bills on time, their reputation can be damaged beyond recovery, making it difficult for them to find new investors or service current creditors.
Cover each investor individually by asking if there are ever any problems? Are people aware of their obligations to other creditors? Can anyone vouch for them during this period? Is there anything suspicious going on like missing money, etc.?
It may also be helpful to ask how many defaults an individual has experienced so that you can gauge whether or not they are riskier than others.
Fund structure
One of the key components to private equity investing is how the fund is structured. A general partnership or GP will have investors that contribute capital in exchange for an investment share in the firm.
The partners’ responsibilities are typically split into two: management and ownership. Management includes things like hiring, firing, paying bills, and marketing the property. Ownership means creating a shareholder’s agreement, setting up shareholders’ meetings, and deciding who gets paid what dividend income.
General partnerships can be modified easily by having some partner(s) drop out, adding new ones, or changing the percentage ownership interests. This makes it easy to add or subtract from the initial end goal!
Another option is limited liability companies (LLCs). These don’t allow members to “own” the company as individuals, only the profits. As such, their personal assets are protected from claims related to business ventures.
This protection can also extend to any debts or liabilities they may incur while running the business. However, if something bad happens and someone sues them, then their personal wealth would be used to defend themselves.
Financial structure
As mentioned earlier, PE firms typically invest their money in either real estate loans or investment properties. They may do both at once!
A private equity firm will usually start with about 2-5 million dollars to buy an asset. This is what’s called a “preferred stock” investing round.
The investors get back their initial capital within one year, but can make a profit through the asset’s growth.
This is why it’s important for owners to retain strong leadership of their business — PE funding is only a small part of the picture. You should be aware of how well you are running your company, so that you don’t need the help money from outside sources.
Another important thing to note is that even though the investor is buying a piece of the property, they are not necessarily taking over ownership immediately.
They work with the current owner/manager and sometimes take longer than expected to gain full control of the company.
This is because they want to ensure there aren’t too many internal conflicts of interest when improving operations.
Legal structure
Before you start looking at properties, you’ll need to know what kind of business entity will own and operate them. This is known as your legal structure, or how your property company will be organized.
You can form an individual owner/seller LLC, a personal service professional corporation (PSC) or even a limited liability company (LLC).
Each type of business has its pros and cons, so it’s best to do some research before deciding which one makes the most sense for you.
Some examples of PSOs are doctors, lawyers, architects, etc. They get their own professional license, use the corporate overhead for things like marketing, advertising and employee benefits, and limit themselves financially from liabilities such as malpractice claims.
More expensively, an SPC costs around $100 per year to run, but there isn’t any additional income tax due unless they make more than $50k in total annual revenue. An LLC costs about $250-$500 per year to maintain, and there’s no extra cost for capital gains taxes when you sell the asset.
Legal fees depend on the size of the transaction and the level of complexity, but overall, the less complex the business, the lower the fee.
Selecting the property
The next step in this process is finding your dream home or investment opportunity. You can do so by either buying or investing in real estate, both of which are discussed at length below.
The easiest way to find your ideal property is to look for ones that are close to you. This could be looking for a house near your work, a condo within walking distance of your kids’ school, or a villa within an easy commute of your current residence.
Alternatively, there are many sites where you can search for properties online. Some make it easier to browse through expensive homes while others have more casual lists. No matter what site you choose, make sure to check out each one thoroughly before making a purchase!
There are several different types of investments that use private equity as a source of money. Different areas require different levels of funding, and not all sectors offer as high returns. It is important to know what type of PE project you want to invest in before deciding who to hire as a partner.
Marketing and advertising
A private equity firm will typically hire an outside company to market and promote their properties, as well as find new investors for them. This is done through advertisements, flyers, direct mailers, and even creating your own digital marketing strategies.
Marketing a home can include listing it on real estate websites like Zillow and Redfin, putting up signs, going door-to-door with potential buyers, hosting open houses, writing articles or doing interviews about the property, and more. These things all cost money, which most of these companies’s shareholders profit from!
There are also different ways to advertise a house. You can do traditional billboard ads, newspaper ads, online ads, and so on. The type of advertisement depends on the audience. For example, people who are looking to purchase a home may not be exposed to online listings, so using that medium would be helpful in exposure.
On the other hand, people who already have a place to live might not need much help finding a house, so such targeted advertisements could go unused. It all just depends on how many people each ad reaches.
